The word insurance is commonly used without thinking what it means or how it actually works. The most common insurance that we may hear about are: car, medical, home and life. Insurance has a big impact on our everyday lifestyle but the average person would not be able to explain in detail the function of the various types of insurance that exist. Insurance is defined as transferring the risk of loss from one entity to another in exchange for financial protection, and for this protection there is a fee to be paid. If you don’t purchase insurance and an accident happens to you then you are fully responsible for all loss or injury. Insurance is a contract between two parties, where one is seeking financial protection and the other is willing to provide the financial protection.
Important Terms
Now that we have defined what insurance is, we can attempt to get a better knowledge of how insurance works. However, before we can try to understand the fine details, one must understand important terms that are used every day in the insurance world.
Insurer: This is the insurance company that is providing insurance to protect you.
Policyholder: A person who is seeking protection by purchasing insurance from the insurance
company.
Policy: Is a contract that gives conditions for how the policyholder will be compensated by the insurer.
Premium: This is the amount charged by the insurer to the policyholder, its usually a monthly or annual payment.
Deductible: Also known as a co-payment in medical insurance, this is the amount the policyholder must pay out of pocket before the insurance company can pay you for a claim.
Claim: The insured submits a request to the insurer to be compensated for a loss, which then is processed by a claim adjuster.
Insurance Types
Now that we have established what the definition of insurance is and the basic key parts to an insurance agreement, lets understand the most important different types of insurance.
Auto: Since this is usually required by state law, it’s the most common type of insurance. Anytime you buy, rent or lease a vehicle, you are required to have insurance. Insurance provides you the protection if your car either gets stolen, damaged in a natural disaster, or vandalized.
Medical: Health insurance provides you the peace of mind of knowing that if you encounter any health issues, you are financially protected from medical costs. You can focus on regaining your health rather than the financial costs of being admitted to a hospital.
Home: As a homeowner, if you have a mortgage, then you are required to provide homeowner’s insurance. Homeowner’s insurance protects your home damage or theft. If you own multiple properties and choose to rent your home out, then there is an option for you to have homeowner rent insurance as well.
Life: Life insurance is a contract between the policy owner and an insurer. However, life insurance is a little different in that the policy guarantees the insurer will pay directly to who the beneficiary is (after the insured person has died). The policy owner will determine who shall be the beneficiary and notify the insurance company. The policy owner will be responsible for paying the premium until their death.
Save Money
It is to your benefit to understand the basic terminology when it relates to insurance so you can ask the right questions. When you are able to understand and communicate your desired interests, you’ll do a better job at saving money. Here are some ways for you to save costs when dealing with various insurance types.
- Review your contract and rates every year when you renew and if you notice increases ask the reason for the increase.
- Ask about certain discounts either for having good credit, excellent driving record, working for the government, etc.
- Look into what kind of advantages you can receive for bundling your insurance. Usually the most common is combining auto and home insurance.
- Consider raising your deductible to save money on a monthly basis.
- Read the fine details and understand the type of insurance coverage you have
- purchased.
- Always have great credit since this shows the insurance company you are a reliable partner.
